The US Federal Reserve on expected lines raised key interest rates by 25 basis points to between 0.50 per cent and 0.75 per cent on Wednesday, its second such hike since last December.
US Fed hike rates by 25 bps: The US Federal Reserve raised interest rates for the first time in 2016 at the end of its two-day rate-setting meeting to the Fed’s target range of 0.50 to 0.75 per cent.
The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
“The rate hike was on expected lines. Data from US labour market indicates strong performance and improving outlook for the US economy as well as inflation, which warranted the rate hike,” Rohit Gadia, CEO, CapitalVia Global Research, told ETMarkets.com. Recent data suggests the US economic recovery is gaining momentum, he added.
Impact on Indian markets: Indian markets could witness a negative reaction once it opens for trading on Thursday on Fed hawkish commentary on future rates hikes.
Of late, foreign institutional investors (FIIs) have been selling their holdings in Indian stocks on the back of demonetisation, and uncertainty over rate hike by the US Fed.
“The Fed policy is slightly hawkish as indicated by three rate increases expected in 2017 compared with two rate increases expected in September’s statement,” Ajay Bodke, CEO & Chief Portfolio Manager – PMS, Prabhudas Lilladher told ETMarkets.com.
“It appears to be Fed’s response to the incoming administration’s stated pursuit of strong reflationary policies and fiscal stimulus impacting medium term inflationary outlook,” he said.
US GDP growth: According to FOMC document, the committee sees the media forecast of gross domestic product growing 2.1 percent in 2017, 2 per cent in 2018 and 1.9 per cent in 2019.
Future outlook on rates: The US Federal Reserve sounded hawkish with respect to hike in interest rates in near future. The Fed’s median outlook for rates rose to three quarter-point increases in 2017 from two as of September.
Impact on Dollar: The interest rate hike shows the strength in the US economy, eventually sending a strong signal to the dollar against a basket of currencies. However, significant strengthening of the dollar would indeed cause serious problems for emerging economies such as India.
“A rate hike by US Fed will send out a strong indication to the currency as well as equity markets, which will bring the rupee down against the dollar,” said Sudhanshu of Amrapali Aadya Trading & Investments.